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Uganda got a costly Umeme deal

By Vision Reporter

Added 7th September 2011 03:00 AM

SHOCKING details about the contract that the Government signed with Umeme have emerged, showing that Uganda could have got a costly deal

SHOCKING details about the contract that the Government signed with Umeme have emerged, showing that Uganda could have got a costly deal

By Chris Kiwawulo and Ronald Kalyango

SHOCKING details about the contract that the Government signed with Umeme have emerged, showing that Uganda could have got a costly deal

The agreement obtained by New Vision was first signed on May 17, 2004 and it stipulates that the Government can only terminate Umeme’s contract if it paid the company a buyout amount.

According to the agreement, the Government would be required to pay Umeme over sh4.7 trillion if it defaulted on the contract.

The Government in 2004 gave the concession to manage the country’s power distribution to Umeme, owned by Actis Capital , a subsidiary of the UK Commonwealth Development Corporation.

Sam Zimbe, Umeme’s General Manager said last week, the company had invested sh280b in the distribution system as of December 31, 2010 and there were plans for further investment.

The total national budget for this year is sh8.03 trillion. Experts say the sh4.7trillion compensation would be more than the budgets of energy, transport, education and health, the four biggest votes, put together.

New Vision has also accessed a copy of the amended clauses of the hitherto secret contract. The amendments were done on different dates in 2006.

When contacted yesterday, energy state minister Simon D’Ujanga stated: “The contract was signed and that is behind us.”

Asked whether he thought Uganda had got a good deal, he responded, “My opinion now does not matter. Every contract has a termination clause. If that is what the contract says, then you terminate according to the clause. Where were the experts when the contract was signed?”

Zimbe did not comment on the contract when contacted at 8:41pm yesterday.

The buyout amount is calculated against the cost of modifications/investment that is not depreciated and unrecovered by Umeme before the retransfer of the distribution system to the Uganda Electricity Distribution Company Limited (UEDCL).

The invested amount ($102m) is multiplied by 120% annually from the initial period of investment (2006) up to the end of the 13th anniversary (2017).

Thereafter, the money keeps on reducing every year as the percentage multiplied with the invested money also keeps on declining by 2% per annum up to the end of the contract in 2024.

On the other hand when Umeme defaults, the Government still has to compensate them over sh4.4 trillion. This compensation is 80% of the invested amount from 2006 to 2017.

Then, the money keeps on increasing every year as the percentage multiplied by the invested money also keeps on rising by 2% annually until the end of the contract in 2024.

Such clauses mean Government is most likely to be stuck with the power distributors up to 2024 when the contract ends.

In the event of natural termination of the contract, government would have to pay 105% of the amount Umeme invested at the time of termination, which would be over sh294b. Natural termination of the contract is when the contract expires and the contractor (Umeme) claims they have not recouped their total investments.

The agreement also reveals that in case of termination of the contract due to circumstances beyond the control of both parties (Force Majeure), government pays 90% of the invested money. This would be not less than sh252b. Such circumstances include war, riot, strike, crime, flooding or earthquake or volcanic eruptions.

The contract also obliges the Government to pay an interest of 20% per annum of any outstanding portion of the buyout amount should 91 days elapse after the termination date until it clears the money in full.

This means that should Umeme’s contract be terminated under any circumstances, it is the Ugandan Government to lose money.

During the 2004 agreement, former finance minister Gerald Sendaula signed on behalf of the Government, Irene Muloni, now Energy minister signed for UEDCL as the managing director, while former director David Grills signed on behalf of Umeme.

However, when it came to the amended contract where several clauses were completely scrapped and replaced with those favouring Umeme in 2006, former finance minister Ezra Suruma signed on behalf of the Government.

Muloni was still the signatory for UEDCL while Paul Mare, the then managing director and Ian Williams, the then chief financial officer signed on Umeme’s behalf.

The Umeme concession was intended to improve the quality of service, increase investment in the rehabilitation and expansion of the power distribution network, reduce losses, increase new connections and provide reliable and affordable electricity to consumers.

However, Umeme has not realised the objectives of the reforms in power distribution as there is high power distribution losses, billing and collection losses, power tariffs, poor quality services and low access levels, according to a recent assessment report of the country’s electricity distribution sector submitted to the energy minister (Muloni).

The 32-page report notes that Umeme is also characterised with high initial connection costs, operation and maintenance costs and lengthy connection time, power outages and theft.

New Vision has seen a copy of the 2011 report titled; ‘Proposal for the review of electricity/power distribution/concession operated by Umeme.

The report done by energy experts noted that the intended benefits of the reforms in electricity distribution have not been achieved because for most of the concession period, the problems in power distribution have persisted.

A July 2008-June 2009 electricity performance report done by the Electricity Regulatory Authority (ERA) showed that power distribution losses in the first quarter of 2005 when Umeme started distributing power, losses registered were at 40%.

There after, it went down to an average of 35%, although the operator had targeted reduction in distribution losses to 28% by the end of 2010.

But Zimbe told New Vision that the losses had reduced to about 27% currently.

The ERA report, however, said the power distributor has been exaggerating billing losses in order to get compensated.

“In practice, this is the reason why there are so many complaints from customers not receiving bills for more than two months and then being subjected to hefty bills in the subsequent month.”

Besides, the report added, the power distributor continues to incur revenue collection losses of up to 7-25% due to inefficiency in its operations.

Although the electricity generation capacity increased above the crisis levels experienced in 2005, the power tariffs have remained at unsustainable levels and are the highest compared with other countries within the region, ERA noted.

The cumulative end user tariffs have risen by 98% since 2004 and consumer tariffs have as a result been rising, ERA observed.

In 2005, domestic consumers paid sh212.5 per unit compared to the current sh385.6.

Today, commercial users excluding business premises such as shops and kiosks pay sh358 per unit while small and medium industrial consumers pay sh333 a unit.

Large industrial consumers pay sh330 per unit while the cost of street lighting is sh385 per unit.

Instead of reducing the tariffs, Umeme wanted them increased further despite the government’s continued input of sh92b to subsidise the electricity sector in order to lower the end user tariffs.

But Zimbe said it was ERA and not Umeme that was in charge of increasing tariffs.

“There is a tariff methodology which was set up by ERA and we abide by it. It considers power generation, transmission and distribution costs. We only submit our cost in distribution. Of the total cost, 80% relates to the power generation and transmission element while 20%,” he said.

Uganda got a costly Umeme deal

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